Mutual Funds now becoming the preferred investment choice in small towns over FDs

Mutual Funds now becoming the preferred investment choice in small towns over FDs

Date :
29/06/2018

Read: 4 mins

Small towns are moving from FDs to Mutual funds. What triggered the change in Mindset and where do they stand at the moment? Read on to know the whole story.

'Investment' may not mean the same thing to two people. Consider K Srinivasalu from Prakasam district in Andhra Pradesh, for whom the word meant parking his money in insurance policies. This was until last year, when he was talked into investing in mutual funds (MF) by a friend who felt he could secure better returns for his money. Without much thought, Srinivasalu jumped into the field of systematic investment plans (SIPs) and put his money into equity mutual funds (EMFs).

Similarly, Dr P Poornima from Tuticorin in Tamil Nadu once used to consider gold and real estate as the ultimate failsafe investments. After reading books and articles on personal finance, she’s had a change of mind and raised her investments in SIP in EMFs by 40%. She considers SIP investments in EMFs to be extremely beneficial when it comes to creating wealth in the long run.

Indian investors are increasingly on the lookout for investment options that lend returns greater than what bank fixed deposits (FD) pay. And it’s not just big-city folk; those in smaller cities are also at the forefront in the race for MF investments. The amount currently invested in mutual funds (AUM or assets under management) is at a record-setting high and amounts to almost one-fifth of the FD stash. At the same time, this is the slowest growth bank deposits have seen since 1963.

At Rs. 115 lakh crore, a mere 6.7% year-on-year increase in overall deposits with banks was seen in 2017-2018, while the 22% year-on-year surge that MF AUMs witnessed was greater than Rs. 21 lakh crore. This is as per data collected from the Association of Mutual Funds in India (AMFI).

When compared to those in bigger cities, people in smaller cities are transitioning faster to growing the extent of their SIPs. For instance, in end-March, the average size of SIPs in B15 cities advanced to Rs. 2679, a growth of 6.5%. At the same time, T15 cities saw a growth of 3.1% with an escalation to Rs. 3766.

The buzz about SIPs is reaching far and wide, even to small towns. According to Srikanth Meenakshi, COO and co-founder of FundsIndia.com, SIPs have seen a heavy inflow in March – reaching an all-time high, for a single month, of Rs. 7119 crore.

According to investment advisers, the main reasons for the shift to mutual funds include poor returns on fixed deposits, recognition of balanced funds with regular payments, and the chronic problem of non-performing assets when it came to banks in the public sector.

The country’s largest and most sought-after bank, State Bank of India (SBI), offers 6.4% interest on an FD with a term of one year. Private sector banks, on the other hand, offer 6-6.7% interest. Furthermore, depending on the investor’s income slab, one can expect returns to dwindle by anywhere between 5% and 30%.

Suresh Parthasarathy, the founder of investment advisory MyAssetsConsolidation.com, feels that bank FDs are leaving people unhappy, as the returns are considered insignificant. In reality, 0.75-1% is the paltry return from FDs.

It’s not only FDs that are suffering. Returns from real estate and gold too have, over the past few years, been less than encouraging. Due to this slow and steady degradation of gold, real estate, and FDs, people are turning to MFs via SIPs as a preferred means of investment.

At present, mutual funds seem to be doing well among not just the elite but the middle class as well, with those from smaller towns and cities especially benefiting from SIPs. Only time will tell whether this trend will prove lucrative in the long run or if traditional forms of investment such as gold and real estate will make a comeback.